A Guide to The Singapore-Indonesia Double Tax Treaty

Introduction 

In terms of GDP, Indonesia holds the top position as Southeast Asia's largest economy. The nation has access to a sizable and skilled workforce, a prime location, and abundant resources. Like Singapore, Indonesia's exponential growth over the past few decades attributes to its investment-friendly policies, attracting many investors and businesses annually.

Although Indonesia and Singapore have had diplomatic ties for more than 50 years, the Singapore-Indonesia tax treaty between the two countries was not legally agreed upon until 1990. The Indonesia-Singapore tax treaty aims to enhance bilateral commerce and investment between the two nations.

All citizens and businesses in the two nations may use this Singapore-Indonesia tax treaty if they abide by its rules. Furthermore, the fact that this agreement is extensive indicates that it covers all kinds of taxes and outlines the different Singapore tax rates and Indonesia tax rates applicable. 

What is the Singapore-Indonesia Tax Treaty?

In 1992, Indonesia and Singapore signed the Indonesia-Singapore tax treaty, which stipulates that all taxes levied on the income of the tax-paying entity in either contracting state must be covered by its terms. A revised agreement on the abolition of double taxation and the prevention of tax evasion was signed by Singapore and Indo on February 4, 2020 and went into effect on July 23, 2021. Both governments' assessments would enhance bilateral commerce, which surpassed USD 40 billion in 2019.

Key Objectives and Scope

A double tax treaty prevents tax evasion and double taxation and protects taxpayers from their consequences. The Singapore-Indonesia tax treaty impacts people and enterprises that are residents of Singapore or Indonesia.

Anyone residing in one of the Contracting States or both is subject to the Indonesia-Singapore tax treaty rules. "Person" refers to any individual, business, or group regarded as an entity for tax reasons. All taxes levied on income on behalf of a Contracting State shall be subject to Indonesia tax or Singapore tax rules as laid down by the tax treaty. In the case of Indonesia, provisions shall apply to the income tax and, to the extent allowed in such income tax, the company tax and the tax on interest, dividends, and royalties. In Singapore's situation, the agreement includes income tax. It thoroughly covers the Singapore vs Indonesia tax rates and what is applicable to each person. 

Definitions 

Residency 

Any person who is a resident of a Contracting State for that Contracting State's taxation refers to as a resident of a Contracting State. This phrase does not cover a foreign company's permanent office that is considered a resident for tax reasons. If a person resides in both nations, their tax residency will be assessed by where their permanent home is. For instance, if an individual hails from Indonesia, but resides in Singapore and Indonesia, then Indonesia tax will be applicable. However, the centre of vital interest will be considered if their permanent residence is in neither of the two countries.

Nationality is considered if the individual does not have a habitual abode in both countries. Suppose the individual is a national of neither Singapore nor Indo, the permanent home or the vital interest factors in. In that case, the contracting states shall determine the residency by mutual agreement. If the person, other than an individual, is a resident of both contracting states, the State where the person's place of effective management is will select it as a residence. When in doubt, the competent authorities of the contracting States will decide the residency by consensus while considering all relevant facts.

Permanent Establishment

The permanent establishment clause is among the most crucial parts of the Indonesia-Singapore tax treaty. Permanent establishments of Indonesian and Singaporean businesses include the following:

• A branch office
• An administrative place
• A quarry, a mining site, or a gas or an oil well
• An office where the business conducts its numerous operations
• A building or a construction project
• A factory or a workshop

Taxes (Singapore & Indonesia) Covered under Singapore-Indonesia Double Tax Treaty(DTT)

No matter how income taxes are collected, this Treaty shall apply to them when imposed by a Contracting State, one of its political subdivisions, or a local government. All taxes levied on total income or components of income, such as taxes on gains from the sale of movable or immovable property, taxes on the entire amounts of wages or salaries paid by businesses, and taxes on capital gains shall be treated as income taxes.

The following taxes come under the Treaty:

Income Tax (Singapore Tax and Indonesia Tax)

The Agreement shall be in addition to, or instead of, the current taxes and shall apply to any identical or substantially equivalent taxes imposed after the date of the Agreement's signature. Any substantial alterations to the tax laws of the Contracting States must be reported to one another by respective competent authorities.

Important Provisions of the DTT

Tax on Dividends

The dividends your business pays to shareholders who reside in a contracting state other than your own would be subject to taxation in that State. However, such a payout may be subject to a maximum tax rate in the State where your company is incorporated.

If the receiver is a business that owns at least 25% of the capital of your company, you will get 10% of the gross amount of the dividends or 15% of the dividends' gross amount, whichever is more significant.

Tax on Royalties 

Royalties would be subject to the proper taxation in the other contracting State if they are earned in one but received in the other, much like interest is when it comes to royalties.

The royalties may be subject to taxation in the nation in which they are issued, depending on the State's law. In this scenario, the beneficiary of the royalties would be required to pay tax at a rate not to exceed 15% of the gross amount.

Tax on Capital Gains

No mention of capital gains is there in the treaty. The tax treatment of capital gains would thus be determined by each State's domestic tax rules, by Article 21. In capital gains tax, Indonesia has the right to tax capital gains that have domestic sources. Capital gains are not subject to tax in Singapore. For instance, a business operating both in Singapore and Indonesia that accrues capital gains will have to pay capital gains tax in Indonesia but not in Singapore. 

Treatment of Business Profit

If an enterprise from a Contracting State does not conduct business in another Contracting State through a Permanent Establishment, its profits are only taxable in that State. However, the other Contracting State may only tax the fraction of the profit directly attributed to the Permanent Establishment. 

Treatment of Income from Property

The clause applies to income from an enterprise's immovable property and income from immovable property used to execute independent personal services. The agreement covers income from the direct use, letting, or any other use of an immovable property.

Treatment of Income from Shipping and Air Transport 

An enterprise that makes income through operation of aircrafts in a Contracting State will be subject to tax only in that Contracting State. For instance, if a business operates an airline from Singapore to Indonesia with operations in Singapore, then it will be taxed in Singapore. The Indonesia tax rate will not apply. 

However, do note that in cases where the income is subject to tax in the other Contracting State, the tax imposed in the other State will be reduced by 50%.  The provisions apply to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency. 

Treatment of Associated Enterprises 

In the case of associate enterprises, the Singapore-Indonesia tax treaty stipulates that the Contracting States may deem a taxable revenue that would have otherwise accrued if the parties were independent, and tax the firms following that assessment.

If a Contracting State levies taxes on profits earned by a resident enterprise, those profits are already subject to taxation by another contracting state. In this case, the first State claims that those profits would have accrued to the enterprise regardless of the associated enterprise condition. It must make an appropriate adjustment to the tax levied on those profits, provided that the other State finds the adjustment justified. The proper authorities of the Contracting States shall consult one another as needed.

Changes to the Indonesia-Singapore Tax Treaty 

The amended Indonesia-Singapore tax treaty came into effect on July 23, 2021, strengthening efforts to combat tax evasion, broaden the tax base, and increase bilateral investment. The treaty update is intended to strengthen Singapore's position as a significant foreign investment in Indonesia. Three key amendments have been made to the Singapore-Indonesia tax treaty: 

The addition of a provision that protects capital gains tax

Capital gains was not regulated under the previous Singapore-Indonesia tax treaty. The investor's country of residency is given the power to tax capital gains from the sales of shares and other assets of Indonesian enterprises under the terms of the new tax treaty.

This exclusion does not apply to the sales of immovable properties, the immoveable property included in a permanent establishment's business property, or shares of private firms whose worth is at least 50% derived from immovable properties. The nation where the selling company resides will be taxed on any gains made from the sale of ships or planes related to those ships' operations.

As a result, investors from Singapore will no longer be subject to Indonesian law's current five per cent tax on the gross revenues from the sale of equity investments owned by a foreign shareholder.

The reduction in royalties' withholding tax in Indonesia and Singapore

The withholding tax in Indonesia is 20%, and the same tax in Singapore is 15%. Royalty payments were previously subject to a 15% withholding tax. The tax rate was reduced by the new treaty. 

• 10% for the use of any copyrighted scientific, artistic, or literary work, including cinematographic films or audio or videotapes, as well as any patents, trademarks, plans, designs, or trade secrets
• 8% goes toward utilising any equipment or expertise used in business, industry, or science

The reduction of the branch profit tax (BPT)

The current BPT rate is 10%, down from the former rate of 15%. However, the rate does not apply to Singaporean or Indonesian businesses or citizens who are party to contracts involving the mining, oil, and gas industries.

Who Can Benefit From Singapore-Indonesia Tax Treaty?

Both persons and businesses residing in one of the two states and engaging in a variety of activities in the other can benefit from the Singapore-Indonesia double taxation avoidance agreement.

The Indonesia-Singapore tax treaty takes the following taxpayer types into account:

• Persons whose personal income is subject to taxation in Singapore and Indonesia.
• Businesses subject to Indonesian and Singaporean taxes on earnings and other gains.
• Businesses of a Contracting State considers being subject to taxation in the other state party to the agreement.
• Taxable entities in Singapore and Indonesia include partnerships, associations, and legal persons.

The Ministry of Finance in Singapore and the Ministry of Finance in Indonesia are the institutions regulating how people and businesses are taxed in the Contracting States.

Other Singapore-Indonesia Treaties

Free Trade Agreement

Free trade agreements allow two or more economies to trade and invest more efficiently. Singapore and Indonesia participate in the ASEAN Free Trade Area as ASEAN members. The ASEAN Trade in Goods Agreement (ATIGA) encourages the free flow of goods between member states and reduces trade barriers. It strengthens economic ties among members, lowers business expenses, boosts trade, and gives ASEAN-based companies access to a larger market and more significant economies of scale. With the help of ATIGA, 99.65 percent of the items from Singapore and Indonesia were no longer subject to intra-ASEAN import tariffs.

Singapore-Indonesia Bilateral Agreement 

BITs, or bilateral investment treaties, encourage and safeguard investments between the two nations. On October 11, 2018, Singapore and Indonesia inked a Bilateral Investment Treaty (BIT). The BIT will strengthen the close economic relations between Singapore and Indonesia while safeguarding the interests of investors. Additionally, the BIT lays out the obligations, rights, and dispute resolution processes for foreign investors from one nation who operate in the other. Companies that work from Singapore to Indonesia will benefit from protection and have access to international arbitration in case of investment disputes. Singapore will provide comparable investment protection for Indonesian businesses operating there.

Conclusion

With up to 100 double taxation agreements, Singapore prevents enterprises outside the country from paying taxes twice. The various double tax agreements also offer tax exemptions or reductions. The entry of the Singapore-Indonesia tax treaty decreases tax avoidance and boosts the effectiveness of cross-border trade. The treaty has made taxation more equitable for persons who have businesses outside of Singapore and are entitled to any treaty benefits.